Recent Posts:

While Microsoft (NASDAQ:MSFT) continues to struggle with smartphones and the PC slowdown, the company still has some strong businesses. Just look at the Xbox franchise. The game console holds about 49% of the market in the U.S. and the total installed base is over 66 million.

As for the next version of the Xbox — called the 720 — it looks like Microsoft wants the system to be more than just games — the goal is to become the entertainment operating system for the home.

For example, according to a report from Xbox World magazine, the 720 is expected to have the a Blu-ray drive and an A/V port for viewing and recording broadcast TV. It also looks like it will have Kinect 2.0, which will sense slight finger movements and allow for monitoring the movements of four players. Oh, and the 720 may have 8GB of RAM, 4 USB slots and a removable hard drive.

No doubt, the system will be extremely powerful and compelling. Perhaps the biggest benefit will be the seamless integration — no need for a separate product for every entertainment option.

But the 720 will not come out soon. Expect a launch for the Christmas season … of 2013. Keep in mind that Microsoft needs to give enough time for developers to create next-generation games and apps. What’s more, the company may even add services like video streaming. There’s even buzz that Microsoft will buy Netflix (NASDAQ:NFLX) and its library of content.

The history of the Xbox definitely shows that Microsoft knows how to innovate and remain relevant. Yet this has not been the case in other important parts of the company, especially with mobile. The company’s partnership with Nokia (NYSE:NOK) has been underwhelming, and the new Windows Phone 8 (WP8) operating system will have a tough time competing with Apple’s (NASDAQ:AAPL) iOS and Google’s (NASDAQ:GOOG) Android. Consider that there are reports that WP8 has been making random reboots on Lumia and HTC handsets.

Unfortunately, the Xbox business will not be enough to improve the fortunes of Microsoft. And investors are starting to realize this — the stock has gone from $31.40 in late September to $26.56 today. All in all, the company needs to find a way to make WP8 into a big business; perhaps the best way to do this is to somehow spread some of the Xbox magic to the division.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at@ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.